Liened Property: How to Foreclose

By Christopher A. LaVoy, Esq.
Tiffany & Bosco, P.C.

I thought it would be useful to review the process for foreclosing on a unit that contains property subject to a lien other than motor vehicles. The process for foreclosing on liened motor vehicles is somewhat different and not covered in this article.

A lien is a legal right to take possession of and sell property to satisfy an unpaid debt.   Lenders often hold a lien on property owned by a borrower to secure repayment of the loan. Any other lien on the renter’s stored property will take priority over your statutory lien for unpaid rent unless the other lienholder knew about and consented to the storing of the liened property at your facility.

When foreclosing on a unit, I recommend that you look in three places to determine if any of the stored property is subject to a lien. The first place you should look is the lease. The renter is required to identify any stored property subject to a lien in the lease. In practice, however, renters often ignore this instruction.

The second place that you should look is the UCC business filings database at the Arizona Secretary of State. You can do this on-line at www.azsos.gov by way of the “quicklinks” toolbar on the website. Type the renter’s name in as a “debtor” to see if he has any property subject to a lien. If any liened property shows up, check to see if it matches anything in the unit. Sometimes the description of the property subject to a lien will not be sufficiently detailed to allow you to determine if it matches anything in the unit, such as a generic reference to “furniture” or “office equipment.” If that happens, call the lienholder listed on the website if possible for a better description of the liened property.

Third, regardless of what shows up on the website, take a look inside the unit to see if there is any stored property that would likely be subject to a lien. Examples of property typically subject to a lien include vending machines, large copiers, telephone networks, mainframe computer systems, and manufacturing equipment. If you find anything like this, and you can identify the seller or leasing company, call to see if there is any lien.

If you determine that any property in the unit is subject to a lien, you are required by statute (A.R.S. § 33-1704) to notify the lienholder at least ten days before the foreclosure sale by certified mail (return receipt requested) of the lienholder’s right to reclaim the property before the foreclosure sale.

It makes sense for you try to reach to the lienholder because, once notified of the renter’s default and forthcoming foreclosure sale, the lienholder will often offer to pay the amount due on the unit in exchange for the liened property, which is an excellent result for you. As technical matter, you are obligated to release the liened property (except for a motor vehicle) even if the lienholder refuses to pay the amount due, but the lienholder usually does not know this and will offer payment if the liened property is valuable. (By contrast, for a motor vehicle the lienholder is obligated to pay the amount due for release of the vehicle.)

If the lienholder does not reclaim the liened property, then you may sell at it at the foreclosure sale. However, you should sell it separately from the other property in the unit. This is because the lienholder is entitled to be paid in full on his claim against the renter from the foreclosure sale proceeds before you receive a penny. Thus, the lienholder will receive payment from the proceeds of the non-liened property as well if you sell all of the property together in a lot. Selling the liened property separately ensures that the lienholder only receives those proceeds associated with the sale of the liened property, rather than the proceeds from all of the property. Send the proceeds from the liened property to the lienholder.

Absent unusual circumstances, the buyer of the liened property at the foreclosure sale will normally take it free and clear of the lien (i.e., with clear title).

Good Luck!

[This article deals with a law related subject at a general level and is not intended for you to rely on. You should consult a lawyer before making a final decision in a situation involving any legal issues.]

Christopher A. LaVoy is partner in the law firm, Tiffany & Bosco, P.C., and serves as AZSA’s legal counsel.

Source: Behind Closed Doors, AZSA Newsletter Archives